Lagging productivity has been a cause for concern among economists, policymakers, but what does it mean for investors
Canadian productivity declined slowly, and then all at once, in the period between the 1960s and today. Falling gradually from highs above 3 per cent annual labour productivity growth in the period between 1962 and 1979, that number dropped to 1.07 per cent between 2000 and 2019, according to statistics Canada. 2020-2023, however, saw that number crater to a growth rate of 0.47 per cent. Absolute labour productivity, as measured by real GDP per hour worked, is significantly below the United States as of 2023, the last year on record - $58.86 to the US’ $83.62. The rest of the G7 is also well above Canada now, at $71.61. It’s a bleak picture and many leading economists and policymakers have sounded the alarm. The question for advisors, however, is whether their client should be worried or opportunistic about this situation.
Robert Armstrong sees the weakness in Canadian productivity as a contributing factor to the relative detachment of Canadian equity markets from the underlying economy. Armstrong is Head of Multi-Asset Strategies at ATB Investment Management Inc., he outlined what this productivity weakness means for investors now, and shared his views as to how Canada can catalyse a new burst of productivity, whether that is through resource development or the technology sector. He explained what advisors and investors can expect to see on markets as this push continues.
“If you have a productivity problem, you're going to have an affordability problem, because people's incomes are not keeping up… At the investor level this means the Canadian stock market does not equal the Canadian economy. The Canadian stock market is basically one third banks and financials, one third resources, and one third other stuff. We haven’t been able to promote all our great private companies and all our next up and coming innovative companies because customers are not able to go out there and buy from them,” Armstrong says. “From my point of view, if productivity was to get better, wages generally go up generally and business is able to spend more. And that could happen then all of a sudden, it just makes earnings growth a lot more attractive for investors… Then all of a sudden people like me who go to the media and say ‘never count out the US consumer, can start to say ‘never count out the Canadian consumer.’”
While recent TSX outperformance against the S&P 500 might make some investors and advisors feel better about the drivers for Canadian earnings growth, Armstrong emphasizes just how detached that performance is from the underlying economy. The largest drivers for the TSX last year were in financials, where interest rate cuts improved margins, and in gold-related stocks that benefitted from a historic price appreciation in gold. While Armstrong and ATB believe in those sectors of the market, they want to see those productivity issues addressed so other more consumer-exposed sectors can start to catch up to Canada’s traditional leaders.
Jumpstarting that productivity, Armstrong argues, begins with the low hanging fruit, the parts of the Canadian economy that can be most quickly and efficiently turned into GDP growth. That, in his view, is the resources and materials sector. The projects now outlined by the new federal government are focused on resource extraction for that reason. He believes that if a few of those projects can prove themselves successful, then the message of a more business-friendly Canada should begin to proliferate, bringing foreign and domestic capital back into Canada. He argues that this should create a virtuous cycle that drives further investment, productivity growth, wage growth, and a stronger Canadian consumer.
Armstrong is beginning to see signs of this already taking place. He notes the example of a new data centre project in Olds, Alberta about one hour north of Calgary. That project, undertaken by a conglomerate of European firms, could be worth as much as $12.8 billion over the next few years, beginning with a first phase worth around $1.25 billion. It relies on cheap and easily available energy in Alberta, and speaks to the role technology may also play in reshaping Canadian productivity.
Despite these glimmers of hope, Armstrong stresses that this will not be a quick fix for the Canadian economy. The TSX, he notes, will likely continue to reflect its traditionally strong sectors rather than the underlying economy. While advisors can continue to make the point to their clients that the economy and stock market are disconnected, Armstrong believes that there are reasons to hope that the Canadian consumer can strengthen and become a market force once again.
“The consumer has impacted the U.S. stock market. In China, in emerging markets, the consumer is impacting the stock markets. And we're starting to see that dramatically. Right now, the consumer is not impacted in Canadian stock market as much as it is, as it can be in the future,” Armstrong says. “We like the Canadian stock market today, but as the economy and the consumer get to be more closely aligned with the stock market, it has potential to become much more longer term return focused.”
